I think this is a pretty good deal that I might get but wanted to get some other experienced insights. It's in great shape and needs nothing.

Asking 170k(it's the avg retail price for the area)

Duplex 4 bed 2 bath upstairs, 2 bed 1 bath downstairs

$1000 Mortgage

$2600 Revenue monthly (rooms rented out individually)

$17300 annual profit with 10%vacancy

$34k out of pocket

2 year break even

Nearly No crime

5 miles from hospital, downtown, med school and nursing school

Plenty of questions.

Just a few -- Is the place zoned for this? Currently used for this purpose? Long term used for this?

Does this area have any groups or the city that are suggesting downzoning or limiting or complaining about this use of the property?

How about competition? Are these med and nursing schools getting ready to build any or more student residences?Any developers building competing properties?

This one looks like about $450 a month per room ($2600/6). Are competing properties doing this charging the same, more or less?

Age of the property? Although you say it needs nothing at this time,everything wears out. What is your expected amount you'll need to set aside for major component replacements? Is this figured into your calculations? Management?

The house has been used as a rental like that for almost 5 years.

1980 Build

New appliances

Roof 3 years old

Self managed

I set aside about 1000 annually for repairs on my properties.

These are lower than avg prices.

Positive Cash flow is always good

House hacking means a great deal of baby sitting.

Why not offer 180K have them cover your closing cost and have them finance it. Offer them a pay off of 180 payments of $1,000.

I am not opposed to paying over asking price - That structure I recommended is a zero percent interest loan. The financing can save you six figures in interest.

Are you asking me if I tell them the installment sale is 0% or are you asking me if I tell them the benefits of having the future tax liability reduced? The zero doesn't happen often but when they do, you save a ton of cash

If you are a seller - which one do you want to hear?

If they don't want an installment sale have them care a small second interest only. After six months of receiving your small checks, let them know that you received a small windfall and would like to know if they can sell the note at a discount if you pay it off early.

The point is, price is important. But I would take terms over price routinely. What would your rate of return of you had no money in the deal?

I am absolutely concerned though in that you are picking house hacking as a niche. It does work, but it is a lot of work and gain everyone's drama. Do you really want that headache?

You know your vacancy rates better than I do, so I'll go with your 10% vacancy.

Gross Potential Rent: $2600 * 12 = $31,200

Vacancy(10%): $3,120

Net Revenue: $28,080

Then I apply my standard rules.

5% capex

15% maintenance

10% management

7% taxes and insurance

___

37% ($11,544)

Net Operating Income (NOI): $16,536

Debt service ($1000 * 12): $12,000

Cash Flow: $4,536

Granted, you didn't say if your Mortage includes just P&I or PITI. That could change things some, but not a huge amount (7%).

$1000 annually for repairs (maintenance, capex, both?) seems low.

Since these are room rentals, who is paying utilities?

Also, it doesn't matter if you self-manage or not. You MUST include a manager's salary if you're going to evaluate this in terms of an investment. Every other investor will evaluate it that way. Your time is worth money; therefore, failing to pay yourself is buying a volunteer job. I've got some of those if you're interested.... (*grins)

All in all, I think your numbers are optimistically too rosy. This property "as is" comes in at 1.5% monthly rent to purchase price ratio (aka "The 1.5%" rule). It is hard to get a 1-2 unit property to cash flow positive unless you're in the 1.7%+ range without a large down payment.

That said, if your numbers pencil out true, it's a solid deal.

If it's been used in that way for 5 years--- what's their motivation for selling? 5 years is pretty much nothing, unless someone is laddering their money into someplace else.

They have shown me the numbers for the past 5 years and vacancy was around 10% on avg.

Utilities come out to about $300 on average a month and are included in the tenants rent.

Not much competition since vacancy has shown to be fairly low and apartments for 1 to 3 bedrooms range from 1000 to 2000.

Could some of you give examples of your deals?

Too me this seems like a solid deal.

The $1000 (about $1060) a month includes utilities and piti.

"The $1000 includes utilities and PITI?"

What $1000...??? The $1000 listed as "Mortgage" in the OP?

I am confused. No one includes utilities in a mortgage payment. Even if that is the case, a $700/month mortgage payment (or is it $760?) on a $136,000 note ($170K - $34K out of pocket) means you're spreading it over 30 years. That's a loooong time to carry debt on a property. By the time it's paid off, you'll need 1 (maybe 2) new roofs, new HVAC, new water heater, etc. Lot of maintenance over 30 years that I think is going to chew up much more than $1000 annually.

Regarding my deals: I already gave my formula. Use whatever numbers you like and the deals all pencil out the same.

STEP 1: Monthly rent to purchase price must be 1.7% or greater. I used to go 2%, but those are harder to find now and 1.7% still works. Just work the numbers backwards.... One Month Rent / 1.7% = Purchase price. Ex. $1000 / 1.7% means I will pay (maximum) $58,800 including purchase, closing, rehab, and holding costs.

STEP 2: Calculate Annual Revenue by taking gross potential rent minus vacancy. Mine are typically less than 3%, but I go 5% and happily outperform my projections.

STEP 3: Subtract expenses from Annual Rent to calculate NOI.

My expenses run around 35-40% and that includes everything, even a manager's salary @10% of gross rent.

NOI = Cash in pocket. If you have debt service, subtract that to get Cash Flow.

I'm uncertain what's going on with your numbers, so I can't really offer a good assessment of this deal. $1000 per year seems low for maintenance, even for a property that doesn't need anything right now. It WILL need something in 1-3 years, so now is the time to start saving for it. Also, you didn't address whether or not you're paying manager or paying yourself to self-manage or volunteering your time for free. But you seem to like it, so go for it.

JB

Sid,

Have you found many properties recently for around 60k that you can charge $1000/month?

I guess I am volunteering my time when I can do certain repairs myself.

Scott, renting by the room is like renting out a hotel. Daily drama and constant hassles. If that's what you like, then more power to ya.

As for up/down duplexes, it is just much more of a pain in my view than side-by-sides. So you have two baths upstairs on this multi-unit that is over 40 years old. Let's say one of the bathrooms starts to have a bad water leak in the upstairs unit. Pretty soon the downstairs tenants call with a huge leak coming through their ceiling, which they just noticed when they got back after visiting Mom for two weeks in Alaska. You now have downstairs tenants that need of a place to live for a couple of weeks while you try to get a plumber and contractor to come in and do an emergency repair. Meanwhile, you've got to deal with the upstairs tenants that also needs to let the contractors in to gain access for several days worth of tear out/replace/reblumb, etc.

The noise complaints from up/down is also always going to be much worse than side-by-side. Now combine that with renting by the room both up and down and tell me how bad do you think it could get? Now I know a lot of folks own the up/downs, but it certainly doesn't have the value of the other option in my eyes. I imagine the current owner is completely burned out from the process and wants out from the headache.

JB

Great explanation

Scott,

JB,

Thanks for the information. Luckily the two I had like that, I never had that issue but that would be pretty problematic. Never had any noise complaint issues either.